Loans and Allowance for Loan and Lease Losses | NOTE 3 – LOANS AND ALLLOWANCE FOR LOAN LOSSES A summary of the loan portfolio as of June 30, 2019 and December 31, 2018 follows (dollars in thousands): June 30, 2019 December 31, 2018 Commercial real estate $ 594,812 $ 550,446 Consumer real estate 255,043 253,562 Construction and land development 123,901 174,670 Commercial and industrial 404,745 404,600 Consumer 26,704 25,615 Other 35,412 20,901 Total 1,440,617 1,429,794 Allowance for loan losses (12,903 ) (12,113 ) Total loans, net $ 1,427,714 $ 1,417,681 The adequacy of the allowance for loan losses (ALL) is assessed at the end of each quarter. The ALL includes a specific component related to loans that are individually evaluated for impairment and a general component related to loans that are segregated into homogeneous pools and collectively evaluated for impairment. The ALL factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics, which are adjusted by management to reflect current events, trends, and conditions. The adjustments include consideration of the following: changes in lending policies and procedures, economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans, concentrations, and other external factors. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes all commercial loans, and consumer relationships with an outstanding balance greater than $500,000, individually and assigns each loan a risk rating. This analysis is performed on a continual basis by the relationship managers and credit department personnel. On at least an annual basis an independent party performs a formal credit risk review of a sample of the loan portfolio. Among other things, this review assesses the appropriateness of the loan’s risk rating. The Company uses the following definitions for risk ratings: Special Mention – A special mention asset possesses deficiencies or potential weaknesses deserving of management’s attention. If uncorrected, such weaknesses or deficiencies may expose the Company to an increased risk of loss in the future. Substandard – A substandard asset is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. Doubtful – A doubtful asset has all weaknesses inherent in one classified substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset exist, therefore, its classification as an estimated loss is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Loans not falling into the criteria above are considered to be pass-rated loans. The Company utilizes six loan grades within the pass risk rating. The following tables present the loan balances by category as well as risk rating (dollars in thousands): Non-impaired Loans June 30, 2019 Pass/Watch Special Mention Substandard Total Non-impaired Total Loans Total Commercial real estate $ 592,071 $ 164 $ 1,228 $ 593,463 $ 1,349 $ 594,812 Consumer real estate 250,647 1,677 1,820 254,144 899 255,043 Construction and land development 123,710 50 17 123,777 124 123,901 Commercial and industrial 383,040 10,856 9,531 403,427 1,318 404,745 Consumer 26,661 — 4 26,665 39 26,704 Other 35,412 — — 35,412 — 35,412 Total $ 1,411,541 $ 12,747 $ 12,600 $ 1,436,888 $ 3,729 $ 1,440,617 December 31, 2018 Commercial real estate $ 547,616 $ 177 $ 1,262 $ 549,055 $ 1,391 $ 550,446 Consumer real estate 249,273 1,676 1,691 252,640 922 253,562 Construction and land development 174,591 52 19 174,662 8 174,670 Commercial and industrial 388,719 7,790 6,545 403,054 1,546 404,600 Consumer 25,556 1 27 25,584 31 25,615 Other 20,901 — — 20,901 — 20,901 Total $ 1,406,656 $ 9,696 $ 9,544 $ 1,425,896 $ 3,898 $ 1,429,794 None of the Company’s loans had a risk rating of “Doubtful” as of June 30, 2019 or December 31, 2018. The following tables detail the changes in the ALL for the three and six months ended June 30, 2019 and 2018 (dollars in thousands): Commercial real estate Consumer real estate Construction and land development Commercial and industrial Consumer Other Total Three Months Ended June 30, 2019 Balance, beginning of period $ 3,514 $ 1,017 $ 2,366 $ 5,524 $ 139 $ 399 $ 12,959 Charged-off loans — — — (26 ) (41 ) (51 ) (118 ) Recoveries 6 13 — 14 22 7 62 Provision for loan losses 402 112 (633 ) 6 46 67 — Balance, end of period $ 3,922 $ 1,142 $ 1,733 $ 5,518 $ 166 $ 422 $ 12,903 Three Months Ended June 30, 2018 Balance, beginning of period $ 3,512 $ 1,036 $ 1,742 $ 7,798 $ 122 $ 353 $ 14,563 Charged-off loans — — (79 ) (12 ) — (91 ) Recoveries 6 1 — 53 4 — 64 Provision for loan losses 33 20 22 7 6 81 169 Balance, end of period $ 3,551 $ 1,057 $ 1,764 $ 7,779 $ 120 $ 434 $ 14,705 Commercial real estate Consumer real estate Construction and land development Commercial and industrial Consumer Other Total Six Months Ended June 30, 2019 Balance, beginning of period $ 3,309 $ 1,005 $ 2,431 $ 5,036 $ 105 $ 227 $ 12,113 Charged-off loans — — — (26 ) (78 ) (96 ) (200 ) Recoveries 12 16 16 41 19 104 Provision for loan losses 601 121 (698 ) 492 98 272 886 Balance, end of period $ 3,922 $ 1,142 $ 1,733 $ 5,518 $ 166 $ 422 $ 12,903 Six Months Ended June 30, 2018 Balance, beginning of period $ 3,324 $ 1,063 $ 1,628 $ 7,209 $ 91 $ 406 $ 13,721 Charged-off loans — — — (226 ) (25 ) — (251 ) Recoveries 10 2 — 326 51 — 389 Provision for loan losses 217 (8 ) 136 470 3 28 846 Balance, end of period $ 3,551 $ 1,057 $ 1,764 $ 7,779 $ 120 $ 434 $ 14,705 A breakdown of the ALL and the loan portfolio by loan category at June 30, 2019 and December 31, 2018 follows (dollars in thousands): Commercial real estate Consumer real estate Construction and land development Commercial and industrial Consumer Other Total June 30, 2019 Allowance for Loan Losses: Collectively evaluated for impairment $ 3,922 $ 1,142 $ 1,733 $ 5,348 $ 166 $ 422 $ 12,733 Individually evaluated for impairment — — — 170 — — 170 Acquired with deteriorated credit quality — — — — — — — Balances, end of period $ 3,922 $ 1,142 $ 1,733 $ 5,518 $ 166 $ 422 $ 12,903 Loans: Collectively evaluated for impairment $ 593,463 $ 254,144 $ 123,777 $ 403,427 $ 26,665 $ 35,412 $ 1,436,888 Individually evaluated for impairment 1,238 213 117 616 8 — 2,192 Acquired with deteriorated credit quality 111 686 7 702 31 — 1,537 Balances, end of period $ 594,812 $ 255,043 $ 123,901 $ 404,745 $ 26,704 $ 35,412 $ 1,440,617 December 31, 2018 Allowance for Loan Losses: Collectively evaluated for impairment $ 3,309 $ 1,005 $ 2,431 $ 5,036 $ 105 $ 227 $ 12,113 Individually evaluated for impairment — — — — — — — Acquired with deteriorated credit quality — — — — — — — Balances, end of period $ 3,309 $ 1,005 $ 2,431 $ 5,036 $ 105 $ 227 $ 12,113 Loans: Collectively evaluated for impairment $ 549,055 $ 252,640 $ 174,662 $ 403,054 $ 25,584 $ 20,901 $ 1,425,896 Individually evaluated for impairment 1,278 183 — 817 — — 2,278 Acquired with deteriorated credit quality 113 739 8 729 31 — 1,620 Balances, end of period $ 550,446 $ 253,562 $ 174,670 $ 404,600 $ 25,615 $ 20,901 $ 1,429,794 The following table presents the allocation of the ALL for each respective loan category with the corresponding percentage of the ALL in each category to total loans, net of deferred fees as of June 30, 2019 and December 31, 2018 (dollars in thousands): June 30, 2019 December 31, 2018 Amount Percent of total loans Amount Percent of total loans Commercial real estate $ 3,922 0.27 % $ 3,309 0.23 % Consumer real estate 1,142 0.08 1,005 0.07 Construction and land development 1,733 0.12 2,431 0.17 Commercial and industrial 5,518 0.39 5,036 0.35 Consumer 166 0.01 105 0.01 Other 422 0.03 227 0.02 Total allowance for loan losses $ 12,903 0.90 % $ 12,113 0.85 % The following table presents the Company’s impaired loans that were evaluated for specific loss allowance as of June 30, 2019 and December 31, 2018 (dollars in thousands): June 30, 2019 December 31, 2018 Recorded investment Unpaid principal balance Related allowance Recorded investment Unpaid principal balance Related allowance With no related allowance recorded: Commercial real estate $ 1,349 $ 1,416 $ — $ 1,391 $ 1,775 $ — Consumer real estate 899 1,307 — 922 1,204 — Construction and land development 124 151 — 8 18 — Commercial and industrial 704 1,478 — 1,546 6,350 — Consumer 39 68 — 31 56 — Other — — — — — — Subtotal 3,115 4,420 — 3,898 9,403 — With an allowance recorded: Commercial real estate — — — — — — Consumer real estate — — — — — — Construction and land development — — — — — — Commercial and industrial 614 4,744 170 — — — Consumer — — — — — — Other — — — — — — Subtotal 614 4,744 170 — — — Total $ 3,729 $ 9,164 $ 170 $ 3,898 $ 9,403 $ — The following table presents information related to the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2019 and 2018 (dollars in thousands): Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018 Average recorded investment Interest income recognized Average recorded investment Interest income recognized Average recorded investment Interest income recognized Average recorded investment Interest income recognized With no related allowance recorded: Commercial real estate $ 1,356 $ 19 $ 1,181 $ 15 $ 1,365 $ 35 $ 1,189 $ 25 Consumer real estate 916 4 — — 917 4 — — Construction and land development 128 1 — — 128 1 — — Commercial and industrial 709 19 — — 709 19 — — Consumer 44 — — — 44 — — — Other — — — — — — — — Subtotal 3,153 43 1,181 15 3,163 59 1,189 25 With an allowance recorded: Commercial real estate — — — — — — — — Consumer real estate — — — — — — — — Construction and land development — — — — — — — — Commercial and industrial 732 — 5,425 31 760 — 5,345 118 Consumer — — — — — — — — Other — — — — — — — — Subtotal 732 — 5,425 31 760 — 5,345 118 Total $ 3,885 $ 43 $ 6,606 $ 46 $ 3,923 $ 59 $ 6,534 $ 143 Interest income recognized on a cash basis for impaired loans amounted to $15,000 and $25,000 for the three and six months ended June 30, 2018. No interest income was recognized on a cash basis for impaired loans during the three or six months ended June 30, 2019. The following table presents the aging of the recorded investment in past-due loans as of June 30, 2019 and December 31, 2018 by class of loans (dollars in thousands): 30 - 59 60 - 89 Greater Than Days Days 89 Days Total Loans Not Past Due Past Due Past Due Past Due Past Due Total June 30, 2019 Commercial real estate $ — $ 1,307 $ — $ 1,307 $ 593,505 $ 594,812 Consumer real estate 378 947 733 2,058 252,985 255,043 Construction and land development — 51 — 51 123,850 123,901 Commercial and industrial 89 271 614 974 403,771 404,745 Consumer 161 29 54 245 26,459 26,704 Other — — — — 35,412 35,412 Total $ 628 $ 2,605 $ 1,402 $ 4,635 $ 1,435,982 $ 1,440,617 December 31, 2018 Commercial real estate $ 300 $ 227 $ — $ 527 $ 549,919 $ 550,446 Consumer real estate 69 75 775 919 252,643 253,562 Construction and land development — — — — 174,670 174,670 Commercial and industrial 54 — — 54 404,546 404,600 Consumer 52 — 43 95 25,520 25,615 Other — — — — 20,901 20,901 Total $ 475 $ 302 $ 818 $ 1,595 $ 1,428,199 $ 1,429,794 The following table presents the recorded investment in non-accrual loans, past due loans over 89 days outstanding and accruing and troubled debt restructurings (“TDR”) by class of loans as of June 30, 2019 and December 31, 2018 (dollars in thousands): Non-Accrual Past Due Over 89 Days and Accruing Troubled Debt Restructurings June 30, 2019 Commercial real estate $ — $ — $ 1,238 Consumer real estate 676 278 — Construction and land development 124 — — Commercial and industrial 616 — — Consumer 27 24 — Other — — — Total $ 1,443 $ 302 $ 1,238 December 31, 2018 Commercial real estate $ — $ — $ 1,391 Consumer real estate 1,187 214 — Construction and land development 19 — — Commercial and industrial 817 — — Consumer 55 — — Other — — — Total $ 2,078 $ 214 $ 1,391 As of June 30, 2019 and December 31, 2018, all loans classified as nonperforming were deemed to be impaired. As of June 30, 2019 and December 31, 2018, the Company had a recorded investment in TDR of $1.2 million and $1.4 million, respectively. The Company had no specific allowance for those loans at June 30, 2019 or December 31, 2018 and there were no commitments to lend additional amounts. Loans accounted for as TDR include modifications from original terms such as those due to bankruptcy proceedings, certain modifications of amortization periods or extended suspension of principal payments due to customer financial difficulties. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s loan policy. Loans accounted for as TDR are individually evaluated for impairment. There were no new TDR identified during the three or six months ended June 30, 2019 or 2018. There were no TDR for which there was a payment default within twelve months following the modification during the three or six months ended June 30, 2019 or 2018. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. Acquired Loans The following table presents changes in the carrying value of purchased credit impaired (“PCI”) loans (in thousands): Three Months Ended Six Months Ended June 30, 2019 June 30, 2019 Balance at beginning of period $ 1,608 $ 1,620 Change due to payments received and accretion (71 ) (83 ) Change due to loan charge-offs — — Other — — Balance at end of period $ 1,537 $ 1,537 The following table presents changes in the accretable yield for PCI loans (in thousands): Three Months Ended Six Months Ended June 30, 2019 June 30, 2019 Balance at beginning of period $ 438 $ 440 Accretion (33 ) (45 ) Reclassification from (to) nonaccretable difference — — Other, net 10 Balance at end of period $ 405 $ 405 PCI loans had no impact on the ALL for the three or six months ended June 30, 2019 or 2018. |